While the U.S. real estate market is currently enjoying an upswing in most areas, it’s seen numerous downturns over the years. Whether the market is up or down, commercial property owners and investors continually look for ways to enhance profits. Here are some suggestions to consider.
Keep expenses low
The value of commercial real estate often is a function of the property’s net operating income (NOI). NOI equals gross rental income less vacancy and operating expenses. One way to maximize NOI is to reduce expenses.
You might, for example, adjust energy-related expenditures, such as your automated energy management system. Instead of just setting the start and stop times, adjust the settings to take advantage of weekends, holidays and other downtimes.
Buildings consume a surprising amount of energy overnight, even when they’re essentially unoccupied. Have your cleaning staff turn off lights when they finish a room, or install sensors that will automatically turn them off. Turn off copiers, printers and other office equipment at night. Implementing these types of environmentally friendly practices may improve tenant satisfaction, while simultaneously boosting property value.
Review your properties’ monthly utility and water bills to ensure that you’re charging tenants properly for their consumption. Be sure to watch for unusual spikes in usage.
It can also pay to revisit your service contracts. For example, windows may not need to be washed so often, and parking lots may be blacktopped less frequently. Rebidding or renegotiating contracts may lead to cost savings, particularly if you take advantage of economies of scale by hiring the same contractor to service multiple properties.
Reconsider your internal maintenance, too. Do you take a preventive approach to maintenance that follows a time-based schedule? Try adopting a predictive approach that relies on statistics and past experience to determine the optimal intervals for servicing equipment.
Other expenses worth re-evaluating include real estate taxes and insurance. Generally, as property values increase, you’ll pay more in taxes and insurance premiums. Review both closely with the county assessor and your insurance agent to determine whether the increases are justified.
Although interest isn’t customarily part of the NOI equation, it can be a significant expense, depending on a property’s debt load. While interest rates are still low, banks may be willing to negotiate if you’re creditworthy.
Another way to boost your NOI is to decrease vacancy. Careful management can result in lower carrying costs and quicker leasing. Visit all your properties regularly to check for any problems that might delay leasing — such as a leaky roof or malfunctioning security system. Keep the premises clean and free of trash and pests. Ensure that maintenance continues on the roof, HVAC system, elevator and similar components so that they’re in working order for new tenants.
Remember, while it’s important to confirm that these systems are fully functioning, they don’t need to operate 24/7. As with occupied space, adjust the start-up and shutdown mechanisms to reduce energy costs.
Retain happy tenants
It’s much more economical to hold on to existing tenants than to land new ones. Retaining tenants requires keeping them happy.
Regular communication is critical. Answer your phone and respond to e-mails promptly. Give tenants both your office and cell phone numbers. Also consider conducting annual tenant surveys to determine whether they’re satisfied and if they see areas that could be improved. At the very least, a survey shows that you value the tenants’ opinions.
Your employees are usually the front line of tenant relations. So, develop an incentive structure that encourages them to provide outstanding service. And then reward and recognize those who go the extra mile.
Finally, remember that janitorial and HVAC issues usually top the list of tenant complaints. By keeping a close eye on these services, you can preempt many problems.
Staying atop needed maintenance and reining in your expenses is important whether commercial property values are declining or rising. By following the ideas in this article, your properties should be on the road to optimal profitability.